The Bank of Canada is signalling that its first interest-rate hike since 2010 could be less than a year away amid a surprisingly strong economy and signs of overheating in Toronto's housing market.

The shift in tone from Governor Stephen Poloz comes as the central bank opted Wednesday to keep its key overnight rate unchanged at 0.5 per cent, where it has stood since July, 2015.

But Mr. Poloz acknowledged what most economists have been saying for months – that the Canadian economy has gained traction. As a result, the central bank significantly upgraded its forecast for gross-domestic-product growth this year to 2.6 per cent, from the 2.1 per cent it estimated just three months ago.

And Mr. Poloz explicitly backed off his recent talk of more rate relief.

"Given the data that we've seen in the last few months, I can say quite clearly: No, a rate cut was not on the table at this time," Mr. Poloz told reporters in Ottawa. "As we've outlined pretty bluntly … we're decidedly neutral."

The more hawkish language initially sent the Canadian dollar up about half a cent (U.S.) Wednesday as investors bet that higher rates may be coming sooner than expected. The dollar closed up .33 to 75.34 cents.

"Economic growth has been faster than expected," the bank said in a statement. "While the recent rebound in GDP is encouraging, it is too early to conclude that the economy is on a sustainable growth path."

The bank also issued a fresh warning about speculation in the Toronto-area housing market as sales, starts and prices continue to spike.

"Any price that is rising at a rate of 30 per cent or more has divorced itself from fundamentals that we can identify," Mr. Poloz told reporters.

The average price of detached homes, semis, condos and townhouses all jumped by more than 32 per cent across the Greater Toronto Area (GTA) in March, compared with the same month last year. And the sharp gains are now spreading throughout Ontario's Golden Horseshoe region.

But the economic news is not unambiguously good for Canada. The bank downgraded the economy's growth potential as a result of persistently weak business investment and falling labour productivity. The combination of faster growth this year and weaker potential growth means the economy is now on track to reach full capacity in the first half of next year – an indication of when the bank will start to fret about inflation. The bank had previously set a target of "around mid-2018."

The bank's calculation that the economy will reach full capacity faster than expected means the "timetable for a first rate hike is also moving up," Canadian Imperial Bank of Commerce economist Avery Shenfeld said in a research note.

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But Toronto-Dominion Bank economist Brian DePratto said Mr. Poloz remains focused on the "soft spots " in the economy, including weak wage growth and sluggish exports. "It seems to be all about the negatives for Governor Poloz," Mr. DePratto said.

The bank's brighter near-term outlook is tinged with numerous caveats, including its assessment that at least some of the economy's fast start in 2017 may be "temporary."

The bank also warned that "a notable increase in global protectionism" is now the greatest source of uncertainty buffeting the Canadian economy.

Canada is facing a raft of potential threats in the United States – the destination for nearly three-quarters of its exports. These include pending tariffs on softwood lumber, a proposed border tax, "Buy America" restrictions and the renegotiation of the North American free-trade agreement.

None of that is built into the bank's new forecast, even though it's weighing heavily on business investment in Canada.

"The economic upturn is not yet perceived to be sufficiently certain or sustainable to warrant major investment expenditures," the bank said in its latest Monetary Policy Report, released on Wednesday. "Canadian firms remain wary, in part because of concerns about increased protectionism, reduced competitiveness of Canadian firms in the event of corporate tax cuts and regulatory changes in the United States."

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So while the economy is doing better this year, the bank expects growth to slow significantly in 2018 and 2019. It's now forecasting GDP growth of 1.9 per cent in 2018, down from a projection of 2.1 per cent, and 1.8 per cent in 2019.

On inflation, the bank said that while the consumer price index is currently at the bank's 2-per-cent target, key measures of "core" inflation have been "drifting down in recent quarters," according to the statement.

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